NextCure, Inc. Intrinsic Value Estimate (NASDAQ: NXTC)
How far is NextCure, Inc. (NASDAQ:NXTC) from its intrinsic value? Using the most recent financial data, we will examine whether the stock price is fair by taking the company’s expected future cash flows and discounting them to the present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don’t be put off by the jargon, the underlying calculations are actually quite simple.
Remember though that there are many ways to estimate the value of a business and a DCF is just one method. If you still have burning questions about this type of assessment, take a look at Simply Wall St.’s analysis template.
See our latest review for NextCure
What is the estimated value?
We use what is called a 2-stage model, which simply means that we have two different periods of company cash flow growth rates. Generally, the first stage is a higher growth phase and the second stage is a lower growth phase. In the first step, we need to estimate the company’s cash flow over the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or reported value. We assume that companies with decreasing free cash flow will slow their rate of contraction and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow more in early years than in later years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, so we need to discount the sum of these future cash flows to arrive at an estimate of present value:
Estimated free cash flow (FCF) over 10 years
2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
Leveraged FCF ($, millions) | -$77.8 million | -95.5 million dollars | -90.4 million dollars | $7.87 million | US$10.0m | $12.0 million | $13.8 million | $15.3 million | $16.5 million | $17.5 million |
Growth rate estimate Source | Analyst x2 | Analyst x2 | Analyst x2 | Analyst x2 | East @ 27.58% | Is 19.89% | Is at 14.5% | Is at 10.73% | Is at 8.1% | Is at 6.25% |
Present value (in millions of dollars) discounted at 5.5% | -73.7 USD | -US$85.7 | -US$77.0 | $6.3 | $7.7 | $8.7 | $9.5 | $9.9 | $10.2 | $10.2 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = -173 million dollars
We now need to calculate the terminal value, which represents all future cash flows after this ten-year period. The Gordon Growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average 10-year government bond yield of 1.9%. We discount terminal cash flows to present value at a cost of equity of 5.5%.
Terminal value (TV)= FCF_{2032} × (1 + g) ÷ (r – g) = $18 million × (1 + 1.9%) ÷ (5.5%–1.9%) = $499 million
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= $499 million ÷ ( 1 + 5.5%)^{ten}= $292 million
The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is $119 million. The final step is to divide the equity value by the number of shares outstanding. Compared to the current share price of US$4.9, the company appears around fair value at the time of writing. Remember though that this is only a rough estimate, and like any complex formula – trash in, trash out.
The hypotheses
The above calculation is highly dependent on two assumptions. One is the discount rate and the other is the cash flows. If you disagree with these results, try the math yourself and play around with the assumptions. The DCF also does not take into account the possible cyclicality of an industry, nor the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we view NextCure as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which factors in debt. In this calculation, we used 5.5%, which is based on a leveraged beta of 0.844. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Let’s move on :
While valuing a business is important, it ideally won’t be the only piece of analysis you look at for a business. It is not possible to obtain an infallible valuation with a DCF model. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. For example, if the terminal value growth rate is adjusted slightly, it can significantly change the overall result. For NextCure, there are three relevant elements that you should examine in more detail:
- Risks: Take risks, for example – NextCure has 3 warning signs (and 2 that we don’t like too much) that we think you should know about.
- Future earnings: How does NXTC’s growth rate compare to its peers and the market in general? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.
- Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality actions to get an idea of what you might be missing!
PS. Simply Wall St updates its DCF calculation for every US stock daily, so if you want to find the intrinsic value of any other stock, do a search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.